Barack Obama is clearly fighting an uphill battle against Republicans in his efforts to stimulate the American economy. Indeed, Republicans have held the upper hand throughout his presidency. A key reason, I believe, is that they have a simple, plausible explanation for the cause and cure of the economic crisis: it was caused by big government and will be cured by slashing government, they say repeatedly.
Republicans have been so successful in selling their austerity cure for all that ails us because they have a theory that rings true to unsophisticated minds. They argue that government is no different from the family – prosperity financed with debt is false and unsustainable. The solution is to relentlessly cut back on spending until there is a surplus from which debt can be repaid. Only then can prosperity re-emerge.
A corollary to the conservative mantra is that monetary policy plays no positive role whatsoever; at best it is passive. Active monetary policy is per se destabilising. Excessive money creation enabled the run-up of debt and sows the seeds of inflation, from which a future economic crisis inevitably will spring.
By contrast, there is no simple, coherent explanation from the left for either the cause of the crisis or its cure. I think Mr Obama has hurt himself badly by not putting forward such an explanation early in his administration that would frame his policies and enable his allies to amplify and reiterate it so that it is as widely understood as the competing conservative model.
Mr Obama’s theory could build on the well-established work of John Maynard Keynes, which would attribute the slowdown principally to a fall-off in aggregate demand resulting from the bursting of the housing bubble and other factors. Under such conditions, government consumption and investment spending can compensate for the decline in private spending, taking advantage of unused economic capacity (such as idle plants and unemployed workers) to cheaply build and finance necessary public works that will pay dividends far into the future.
Mr Obama could also explain that monetary policy is severely constrained when interest rates approach zero and requires an active fiscal policy to get money to circulate, increase velocity (the speed at which money circulates) and stop the downward pressure on prices that are paralysing private economic activity.
This is a harder explanation to get people to understand than the conservative alternative. This was true in the 1930s as well. But eventually economists accepted that Keynes was right and the conservatives were wrong.
Mr Obama has already wasted more than three years on ad hoc responses to the crisis without an apparent strategy. But it is not too late. A big economic speech that clearly lays out his economic philosophy and ties together the seemingly disconnected strands of his policies would help him electorally and plough the ground for additional and more effective stimulus.